Discuss the major recommendations of Narasimham Committee which was set up in 1991 to analyze the falling efficiency of the Indian banking sector

The Narasimham Committee, also known as the Committee on the Financial System (CFS), was set up in 1991 by the Government of India to examine and assess the Indian banking sector’s performance and suggest reforms to enhance its efficiency and stability. The committee was chaired by M. Narasimham, who was a former Governor of the Reserve Bank of India (RBI). The committee submitted two reports, commonly referred to as Narasimham Committee I and Narasimham Committee II, in 1991 and 1998, respectively. Here, we’ll discuss the major recommendations from both reports:

Narasimham Committee I (1991):

1. Capital Adequacy: The committee emphasized the need for Indian banks to maintain adequate capital as a buffer against potential risks. It recommended implementing the internationally accepted Basel I norms for capital adequacy, which led to the RBI issuing guidelines on capital adequacy for banks in line with these standards.

2. Banking Sector Reforms: The committee recommended liberalizing the banking sector and reducing government interference to promote competition and efficiency. It suggested reducing the statutory pre-emptions imposed on banks, such as Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR), to free up more resources for lending and investment activities.

3. Non-Performing Assets (NPAs): The committee addressed the issue of rising NPAs in the banking sector. It recommended setting up special tribunals to expedite the resolution of NPA cases and strengthening loan recovery mechanisms.

4. Entry of New Banks: The committee suggested allowing the entry of new private sector banks to introduce competition and innovation in the banking industry.

5. Priority Sector Lending (PSL): The committee recommended rationalizing PSL norms to make them more focused and effective in achieving developmental objectives. It proposed aligning PSL targets with social objectives and reducing the prescription of specific targets for sectors.

6. Banking Autonomy: The committee stressed the importance of granting more autonomy to public sector banks to function efficiently. It recommended reducing government interference in their day-to-day operations and allowing them to function more like commercial entities.

Narasimham Committee II (1998):

The second committee was set up to review the progress of the reforms initiated based on the recommendations of the first committee and to propose further reforms. Some major recommendations were:

1. Recapitalization of Banks: The committee recommended recapitalizing public sector banks to strengthen their financial position and enable them to meet global challenges.

2. Merger of Weak Banks: It suggested merging weak banks with stronger ones to improve the overall health and stability of the banking sector.

3. Asset Reconstruction Companies (ARCs): The committee proposed the establishment of ARCs to take over bad loans from banks, thus enabling banks to focus on their core activities.

4. Introduction of New Banking Products: The committee recommended allowing banks to introduce innovative products and services to cater to the changing needs of customers.

5. Adoption of Technology: To enhance efficiency and customer service, the committee emphasized the adoption of modern technology in banking operations.

6. Governance and Transparency: The committee stressed the importance of improving corporate governance practices in banks and increasing transparency in their functioning.

Both Narasimham Committee I and II played a crucial role in shaping the modern Indian banking sector by promoting liberalization, competition, and efficiency. Many of their recommendations were implemented over time, contributing to the growth and development of the Indian banking industry.

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